Capital and income inequality: An aggregate-demand complementarity

A novel complementarity between capital and income inequality leads to a significant amplification of the effects aggregate-demand shocks on consumption. We characterize this finding using simple model with heterogeneity in household saving income, nominal rigidities, capital. fiscal policy that redistributes causes further amplification, whereas redistributing profits generates dampening. After an interest rate shock, consumption is more countercyclical than inequality, consistent available empirical evidence. Procyclical investment also requires aggressive Taylor rule order attain determinacy, aggravates forward guidance puzzle.